We need the courage to reform entitlements

The presidential election settled only one thing: the majority of voters preferred Barack Obama to Mitt Romney. If it also sent a message about economic policy, it certainly was deeply encrypted in campaign rhetoric. The election was decisive about who would occupy the White House, but it left the U.S. economy without answers to crucial policy questions.

Is government too small, too big, or just right? Are all three choices affordable, and do they have equal impacts on employment and growth in our economy?

Those are important questions for us as we consign 2012 to history and move into 2013. Mistakes in our answers will be very expensive, not just in dollar terms but also when measured in terms of impact on people’s lives.

One reason why the campaign rhetoric was so unhelpful was that those who favor bigger government and those who think the government is already too big often use the same data from the federal budget to make their case.

Those who want a larger federal government generally base their argument on greater needs of American society. Supporters of smaller government most often base their argument on affordability.

Each of these arguments has a complicated subtext involving such things as compassion, American ideals, motivational effects and equality issues. These are not things that can be measured readily, though, and are more easily transformed into campaign rhetoric than economic policy.

Subtexts aside, we would think that answering the question about the size of government should begin by figuring out how big it is now, which would allow us to compare it to how big it was at some earlier time. Nothing involving the federal government is that simple, though.

A wonderful example of this was the effort of Congress years ago to rein in the federal government. The lawmakers figured they could measure the size of government by the number of workers on its payroll. To reestablish its control over the federal government’s size then, it simply passed a law capping the number of government employees.

It was direct, straightforward, and easily measurable. But it didn’t work because Congress underestimated the kudzu-like properties of the federal bureaucracy. The congressional action capped the number of federal employees, but this brought forth a new nation of consultants and contract workers of all descriptions. As a result, head counts have become next to useless as a way to measure the size of government.

For different reasons, mostly related to structural changes in our economy, the two basic ways that most people use to measure the size of government — as a percentage of Gross Domestic Product (GDP), or as total expenditure — have become very complicated accounting stews. As a 28-page report by the Tax Policy Center titled “How Big Is The Federal Government,” put it, “… measuring the size of government is not simple.”

The complexity is what allows the opposing sides to use the same information to back up their arguments. Unfortunately, it also makes these arguments about the size of government almost useless in terms of leading us to answers and policy solutions.

What’s left to us as an economic policy question, then, is whether we can afford the current government’s size. Fortunately, the answer to that is simple: no. The federal government has been spending over a trillion dollars a year of money it doesn’t have, with no end in sight.

We clearly cannot afford this level of government spending, no matter how we measure the size of our government. And even if we delude ourselves into thinking we could continue this policy, the financial markets would eventually disabuse us of this notion.

We cannot tax our way out of this without affecting our prospects for economic growth; the rich simply do not make enough money each year to bail us out and raising taxes for the rest of us would put our economy into a European-like torpor.

We cannot cut spending enough to solve the problem, either, unless we take a political risk by reducing entitlements or are willing to gut our defense system, which brings its own risks in the current global environment.

The federal government’s combined spending on defense, Medicare, Medicaid and the interest on public debt dwarfs all other expenditures. We can chase down waste, inefficiency, and pointless meddling all we like, but unless we address entitlements we’re not going to find the kind of spending reductions we need to solve this problem.

We need to rebalance federal government expenditures with what our economy can afford, over time if we have to, but decisively. It won’t be easy or painless, and it’s a safe bet that that the money will be easier to find than the courage. It always is.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.